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Return Does Not Depend On Volatility - Real Estate Case

6 Feb. 2013

Some scholar papers show that stock returns are not depend on volatility (major risk factor in CAMP and MPT) - see e.g. Jeff Paul's review at

Actually CAMP and MPT states that volatility should define return of assets class but not individual stocks. The finance textbooks usually compare stocks, bonds, CD accounts to show that higher volatility leads to higher average returns. It seems funny that respectable finance academics close their eyes on their own data shown in Fig. 1 below.

Fig. 1.

I reproduce this picture and table from the book "The Equity Premium: Essays and Explorations" by William N. Goetzmann and Roger G. Ibbotson. Anybody (well except the authors - they are silent to comment that the Fig. 1 contradicts MPT and CAMP can see that real estate return are second to stocks and much higher than bonds with much smaller volatility to compare with bonds.

I should admit that real estate required maintenance fees in contrast with stocks and bonds, and it is unclear how to factor the fees to returns.

Anyway IMO this picture shows again that MPT and CAMP are incorrect.